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Although audit firms on both sides of the Atlantic are locked in arms against mandatory audit term rotation, they’re clearly split on how best to maintain auditors’ objectivity and skepticism. While alternatives to mandatory rotation are gaining ground in Europe, the United States may be headed in a different direction.

Stephen Chipman, CEO of Grant Thornton, says there are different debates going on about mandatory rotation on opposite sides of the Atlantic. On one hand, the Europeans are focused on the question of whether there may be too much market concentration of the Big Four accounting firms. They believe mandatory rotation could help to break that up, he says. Meanwhile, in the United States advocates are focused on preventing auditors from getting too cozy with their corporate clients.

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That geographical divide is creating some interesting alternatives to the mandatory rotation concept. Retendering, or the process of putting out the audit function for tender every seven years, is gaining traction in Europe. Under such a regime, a corporation could have the option to keep the incumbent auditor. Another version, called “mandatory retendering with comply or explain,” enables a company to either tender and comply with the requirement or explain why that would not be the best move.

“If you don’t think it’s necessary for valid reasons to retender, you can explain through communication to stockholders and retain your existing auditor. That’s gathering momentum in Europe,” says Chipman.

Retendering makes sense to Jesper Brandgaard, CFO of Danish pharmaceutical concern Novo Nordisk. “It’s relatively easy for us to tender; that interval should be five or seven years,” he says. “Tendering is a way for a company to document it is continuously testing that it gets the right services and it gets the right team.”

In fact, he thinks some version of retendering could work in the United States: “Forced tendering on a minimum frequency of, say, five to seven years I think would be a meaningful compromise that companies should not have too much trouble living up to.”

Chipman also thinks some version of retendering could gain traction in the United States. But a more antiregulatory approach is more likely here.

The difference between European tolerance of audit rotation and what U.S. firms favor may be mainly cultural. “There’s the same level of concentration [by the Big Four] here [in the United States] as in Europe. But the difference is Europeans are much more comfortable having regulation intervene in markets,” adds Chipman.

“You could well see Europeans doing the ‘mandatory retendering with comply or explain’ to get at what they perceive is the major issue — concentration. You could see in the U.S. a different direction — perhaps strengthening audit committees, which is a means of getting around the independence and skepticism (auditing objectives),” he says.

Under the Sarbanes-Oxley Act of 2002, U.S. firms already are required to rotate audit partners every five years. But the Public Company Accounting Oversight Board’s (PCAOB) proposal last summer to make audit-firm rotation mandatory has raised the ire of auditors, companies, and CFOs.

Other countries already have embraced swapping out their audit firms after a given period. France, for one, makes it mandatory to replace audit firms every six years, while Italy allows for a type of retendering after seven years.

But Kate Barton, Americas vice chair of tax services at Ernst & Young, questions the cost of such a rotation. “Do you build in a lot of cost switching off every five years?” she asks rhetorically, contending it would not be as feasible in the United States.

The cost of having to retrain and educate a new audit firm as well as the time it takes to assist auditors who may not have as much of a local presence in a certain area could be staggering. Yet even without mandatory auditor rotation, pressure will mount for greater amounts of auditor independence from the companies they audit and more scrutiny of those companies, many think. And that will lead to higher audit costs regardless.

Grant Thornton’s Chipman sees the discussion opening up opportunities for audit committees to become better educated about auditing. “You still have a relatively small amount of audit experience on audit committees,” he says. “Sarbanes-Oxley requires accounting experience [via the presence of] an accounting expert. Ironically, it doesn’t require audit experience.”

That education could take years, according to Wayne Brownlee, CFO at Canadian fertilizer producer PotashCorp, which has extensive operations and considerable financing in the United States. “If you were going to rotate your auditor, it would take probably two or three years for the education process to take hold where they could actually be in a position to perform what I would call a quality audit,” he says.

Better communication from the PCAOB about its inspections of audit firms could also help, notes Brownlee. “If you are holding the audit committee responsible for the quality of the audit, and there’s an audit being done of the audit, we [the company] don’t get to see it. . . . I don’t think the feedback loop is working very well,” he says.

The PCAOB is currently working on a “communications with audit committees proposal,” according to a board spokesperson.

Clearly, any new alternative audit methods that could come out of the PCAOB’s next Standing Advisory Group meeting on May 17th will add fuel to the rotation argument. It also still plans to have public meetings on the topic.